NATURAL GAS DEPENDENCY- A CHALLENGE FOR THE FUTURE

UNCLAS SECTION 01 OF 03 ISLAMABAD 000810

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ENGY EFIN ECON EINV PREL PK
SUBJECT: NATURAL GAS DEPENDENCY- A CHALLENGE FOR THE FUTURE

REF: Islamabad 655


1. (SBU) SUMMARY. Natural gas meets about 50 percent of Pakistan's
energy requirements, making the country one of the most natural gas
dependent economies in the world. At the present rate of
consumption, the Government of Pakistan (GOP) anticipates a natural
gas shortfall in 2009. Although pipeline discussions are on-going,
no solution is in sight to assist with Pakistan's severe energy
shortage. END SUMMARY.


2. (U) This is the second in a series of cables on Pakistan's energy
sector and provides an overview of the natural gas sector in
Pakistan.

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Natural Gas Dependency
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3. (U) Today natural gas meets about 50 percent of Pakistan's energy
requirements, making the country one of the most natural gas
dependent economies of the world. Pakistan's primary energy
supplies consist of natural gas (50.4 percent),oil (29.4 percent),
hydroelectric power (11 percent),coal (7.6 percent),nuclear power
(1 percent) and liquefied petroleum gas (LPG) (0.40 percent). In
January 2005, Pakistan's natural gas reserves stood at 30.13
trillion cubic feet (TCF),ranking sixth amongst the Asia Pacific
countries. At present, total natural gas production is around 3.7
billion cubic feet per day (BCFD),growing at an annual rate of
10-15 percent which will result in a natural gas demand/supply gap
by 2009.


4. (U) Pakistan has an integrated infrastructure for the
transportation and distribution of natural gas. The country has
around 9,400 km of transmission pipelines and over 64,000 km of
natural gas distribution networks, supplying gas to about 4.3
million consumers.


5. (U) According to Pakistan's Oil and Gas Journal, Pakistan had 28
trillion cubic feet (Tcf) of proven natural gas reserves in 2006.
The bulk of these reserves are located in the southern half of
Pakistan. In 2004, Pakistan produced and consumed 968 billion cubic
feet (Bcf). In light of the current onshore exploration activities
and resource outlook, the GOP expects minor increases in natural gas
production in the short-term. However, natural gas production is
expected to decline over the next 15-25 years, while natural gas
demand is expected to increase.

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Exploration and Production
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6. (U) As the largest domestic natural gas producers, Pakistan's
state-owned Pakistan Petroleum Limited (PPL) and Oil and Gas
Development Corporation Limited produce around 30 percent and 25
percent, respectively, of the country's natural gas. Austrian OMV
is the largest foreign natural gas producer (17 percent of total
country's production) in Pakistan. Additional foreign operators
include British Petroleum, Italian Eni, and BHP Billiton. The
Pakistani government has enacted numerous policies to encourage
private sector leadership of natural gas development, including
privatization of state-run businesses, regulation that encourages
competition and tax incentives geared towards increasing exploration
and production.


7. (U) Pakistan's largest natural gas production occurs at the Sui
field, which is located in the Southern Indus Basin. PPL operates
the Sui field, with production averaging 655 Mmcf/d. Additional
producing fields include Mari (446 Mmcf/d),Sawan (366 Mmcf/d),and
Bhit (316 Mmcf/d). In 2005, BHP Billiton signed a Gas Sales and
Purchase Agreement (GSPA),in which the company will supply an
additional 150 million cubic feet per day (Mmcf/d) of natural gas
from its Zamzama field. BHP Billiton will complete phase II
development of Zamzama in the third quarter of 2007. Malaysia's
Petronas brought its Rehmat field online in March 2005. The field
produces an estimated 30 Mmcf/d, which is sold to consumers in
Pakistan's southern Sindh province. In the past few years, the
country discovered seven new natural gas fields. The Pakistani
government expects the development of these new fields to add an
additional 1 Bcf/d to Pakistan's natural gas production.

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Imported Natural Gas is the Best Option
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8. (U) At the present rate of consumption, the GOP anticipates a
natural gas shortfall in 2009. Imported natural gas is the cheapest
option for meeting Pakistan's present and future energy needs. The
two methods to import natural gas are through pipelines and
liquefied natural gas (LNG). Bulk import of LNG to meet all of
Pakistan's energy needs is not a viable option; infrastructure at
Port Qasim and Karachi Port are not suitable to handle bulk LNG
imports. In addition, upcountry transportation of LNG in
pressurized vessels through heavily populated areas and highways is
very risky. Pipeline transmission of LNG would require laying new
transmission lines and related infrastructure, raising costs to
prohibitive levels. Pakistan is thus pursuing both LNG and natural
gas pipeline import initiatives.


9. (U) Pipeline natural gas can help Pakistan earn transit fees
(over half a billion dollars annually) for onward transmission to
India and/or Afghanistan. Pakistan is currently considering three
pipeline projects, yet none of these is currently viable due to
security, cost, and questionable feasibility.


10. (U) Turkmenistan-Afghanistan-Pakistan Gas Pipeline: The proposed
project is for a 1400km long, 48 inches diameter, over land natural
gas transmission line, capable of transmitting 2 BCFD from
Turkmenistan to Afghanistan and to Multan in Pakistan. Transmission
of gas to India is not included in the project at this stage of
planning according to GOP representatives. Security of the exposed
gas pipeline through Afghanistan is the biggest issue slowing
progress on the project. Completed feasibility studies on the
project, funded by the Asian Development Bank (ADB),indicate that
the Turkmenistan field of Daulatabad will only be able to supply a
portion of the natural gas needed by Pakistan. Turkmenistan's
present gas reserves of 101 TCF and production capacity of 790 BCF
is the lowest of the three options available to Pakistan.


11. (U) Qatar Pakistan Gas Pipeline: The proposed project includes a
1600km long, 44 inches diameter, underwater gas transmission line,
capable of transmitting 2 BCFD from Qatar's North Dome field to
Gwadar Port in Pakistan's Balochistan province. Qatar has proven gas
reserves of 300 TCF giving surplus gas availability for over 50
years. The proposed pipeline, to be laid in international waters at
a depth of about 1000 meters, would be expensive and incur high
maintenance costs. The project would include a connection at the
Port of Gawdar to the Pakistani national transmission system. Even
though Pakistan has signed a preliminary agreement to eventually
purchase natural gas from Qatar, further action on the project has
not been taken for several years.


12. (U) Iran-Pakistan "Peace" Pipeline: Talks on the proposed USD
7.4 billion pipeline to supply Iranian gas to Pakistan (and perhaps
India) through a 2,600km pipeline began in 1994 but have stalled
numerous times. The proposed project includes a 48 inch diameter,
over ground pipeline with a transmission capacity of 3 BCFD from
Iran across the volatile Balochistan province in Pakistan. Of the
three pipeline proposals being considered, Iran has the largest
proven gas reserves with 812 TCF and a reported production capacity
of 1900 BCF.


13. (U) In August 2006, Iran and Pakistan extended a previously
signed (April 2005) memorandum of understanding until 2007. The
pricing structure is the main obstacle for moving forward on the
pipeline and both India and Pakistan express concerns about how much
Iran will charge for the natural gas. To help mediate the pricing
issue, the three countries appointed an international consultant in

2007. Iran has offered to cover 60 percent of the construction costs
of the pipeline and Pakistani officials have stressed their ability
to safeguard the pipeline. Pakistan could earn about USD 70 million
annually in transit fees from the pipeline. If India decides to
forego its part in the pipeline project, Pakistan and Iran have
agreed to work on a bilateral Iran-Pakistan pipeline project.

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Consumers Want Energy
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14. (U) With a goal of reducing dependency on imported oil,
beginning in 1992, the GOP encouraged conversion of oil- based power
plants to natural gas and introduced compressed natural gas (CNG) as
an alternative automotive fuel throughout the country. Today,

ISLAMABAD 00000810 003 OF 003


Pakistan is the third largest user of CNG in the world after
Argentina and Brazil. These measures have reduced oil consumption
but increased natural gas consumption by 20.5 percent. Consumers
have been hard hit by natural gas shortages during the severe winter
and are increasingly frustrated by the long lines at CNG stations to
refuel their vehicles.

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Comment
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14. (SBU) Pakistan is desperate for energy and is looking at all
options for increasing domestic capacity. Natural gas provides a
relatively easy solution to expanding Pakistan's energy resources.
The GOP is well aware of the USG views on moving forward with the
Iran pipeline and Post will continue to monitor all developments in
this field.

PATTERSON